European stocks could be surprise winner if Democrats end up winning the House

Tuesday's midterm elections could see the Democrats take control of the House of Representatives.

That could, according to some analysts, be a major boost for Europe's automakers and miners, vicitims of Trump's China trade policies.

That's because a Democratic house might stifle some of President Trump's more extreme policies, particularly those on trade.

"With the Democrats favorites to take control of the House and the Republicans the Senate, the next couple of years may be far more difficult for Trump," Stephen Innes of OANDA said.

Tuesday's midterm elections in the US are likely — however they go — to mark a seismic moment in US politics.

While the outcome is difficult to predict, the results could be a particular boon for European stocks. If the Democrats win control of the House of Representatives, as many pundits expect, it might make it far more difficult for the Trump administration to continue along its current policy agenda, and could lead to a possible roll-back of some of the president's more aggressive trade policies.

"Immigration and trade reforms are seen as market unfriendly policies and these measures would be less likely to be implemented if the Democrats took the House of Representatives," Roger Jones, head of equities at London & Capital told Bloomberg on Tuesday. "The European market would be happy with more political balance."

The sectors that would likely benefit to the largest degree are those most directly impacted by the trade war in particular. This could mean a surge in share prices for automakers.

Automakers in Europe have been the second worst performing of all stock market sectors in 2018, as fears about Trump hitting autos from the continent with a 25% tariff, and a worrying fall in demand from China and other rapidly growing Asian economies, stunted sales.

"With the Democrats favourites to take control of the House and the Republicans the Senate, the next couple of years may be far more difficult for Trump," Stephen Innes of OANDA noted in an email on Tuesday morning.

Other sectors, including miners, would also likely see a boost from a gridlocked election.

A similar increase could be seen in certain sectors of the Chinese stock market in the event of a flipping of the House to Democrats. Chinese stocks have taken a pounding this year, in part down to the rising spectre of the trade war. In the event that Trump is forced to dial down his trade rhetoric, it would likely be a positive for Chinese stocks.

Could Trump lash out?

There is, however, the possibility that a defeat could push Trump to be more belligerent, and lash out against his rivals further by doubling down on his commitment to change international trade.

It is also possible that markets will see a Democratic win in the House as a material negative, given the huge gains seen in stocks since Trump entered the White House.

"When you consider how markets have done since his election victory - granted, primarily on the back of tax reforms - it's easy to see why this may not be the most investor-friendly result," OANDA's Innes wrote.